Country Report Germany January 2013

Country Report Germany January 2013

Outlook for 2013-17

• The protracted euro zone crisis will present the main risk to political, economic and financial stability. As the region's dominant creditor, Germany will have to pursue domestically unpopular policies to preserve the currency union.
• The German-led crisis response-and its focus on fiscal discipline-could fail to maintain the euro zone in its current form, as austerity measures demanded by Germany in the periphery may prove politically too difficult to implement.
• The Economist Intelligence Unit expects continued tension in the Christian Democratic Union (CDU)/Christian Social Union (CSU)-Free Democratic Party (FDP) coalition, but that the government will last its term to September 2013.
• The Greens, and possibly the Pirate Party, are likely to hold the balance of power in the next parliament. The CDU should win the election ahead of the Social Democratic Party (SPD), but coalition formation could be tricky.
• Polls suggest another CDU/CSU-SPD grand coalition is the preferred outcome for a majority of voters. The Greens could side with either of the main parties.
• We expect the European Central Bank (ECB) to cut its policy rate to 0.5% in early 2013. Pressure for unconventional ECB intervention will persist.
• Domestic economic policy will focus on fiscal consolidation, legislative reform to strengthen the banking system and some pre-election sweeteners.
• The economy will contract in late 2012, but improving sentiment should lead to a rebound in early 2013. After estimated growth of 0.9% in 2012, we forecast real GDP to rise by 0.8% in 2013, and thereafter by an average of 1.4% in 2014-17.

Review

• The CDU confirmed the chancellor, Angela Merkel, as its party leader, while the main opposition SPD officially nominated Peer Steinbrück as its candidate to run against her at the September 2013 general election.
• In late November the Bundestag (the lower house) approved by a wide margin another bail-out package for Greece, designed to reduce its public debt burden and allow the disbursement of the next tranche of official loans.
• In mid-December euro zone finance ministers reached agreement on creating a single supervisor for the European banking system. From 2014, the ECB will assume responsibility for regulating at least 150 of the region's largest banks.
• The German government took a supportive but cautious position, standing firm over its demands related to the timing and coverage of the new regulator.
• Industrial output slumped in October, but sentiment and new orders data have since improved on the back of stronger non-EU export demand. Unemployment continued to edge higher in November, while inflation eased below 2%.

Do to the nature of this product there is no table of contents.